India central bank holds key rates

Mumbai, December 19, 2012

The Reserve Bank of India (RBI) has kept interest rates on hold ignoring government pressure to reduce borrowing costs, but said it was shifting its focus towards boosting a flagging economy, raising the odds of a rate cut as early as January.

The RBI reiterated guidance from its last policy meeting in October that it was likely to resume monetary policy easing in the January-March quarter, as inflation pressures are expected to ease in the next few months.

Wary of stubbornly high inflation, the RBI has kept its key policy rates on hold since a 50 basis point cut in April, in contrast to other big emerging market central banks in China, Brazil and South Korea that have been more aggressive in easing policy to support growth.

On Tuesday, the central held the repo rate at 8 per cent and also kept its cash reserve ratio (CRR) for banks steady at 4.25 per cent, its lowest level since 1974. The CRR is the share of deposits that lenders must keep with the central bank.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," the central bank wrote in its mid-quarter monetary policy review.

A Reuters poll last week showed 37 of 41 economists had expected the RBI to hold the policy repo rate steady, while respondents were roughly evenly split over the likelihood of a cut in the CRR.

A lower-than-expected headline inflation reading in data released on Friday, after the polling was completed, had been seen in some quarters as raising the chances of a rate cut.

"Whatever the RBI spelt out in October seems to have got support from the inflation trajectory," said Abheek Barua, chief economist at HDFC Bank, in New Delhi. "Net of the base effect, we see the current trend continuing and a case for a rate cut strengthening, which they could do in January," he added.-Reuters